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Structured Solutions Desk

Treasury Department
+966 (11) 4042621

Date : 19
th
March 2014
To : Credit Committee
From : Structured Solutions desk - Treasury
Subject : Range Accrual Swap - Product approval

Range Accrual Swap
A range accrual swap is similar to an interest rate swap, where the interest rate paid by the first leg to
the other party is either a fixed or floating interest rate. The main difference is in how the coupon of the
second leg is determined.
Unlike a vanilla interest rate swap where the floating rate is exchanged against the fixed rate on every
payment date, in a range accrual swap the coupon (which can be either a fixed coupon or a floating
coupon) is conditional on some event happening.

In other word, for a range accrual swap where the client pays fixed rate and Riyad Bank pays floating
rate on every payment date, the floating rate is paid only for the days where the index rate (for example
the SIBOR 6 months) is within a predefined range.

The index rate is typically monitored on a daily basis within the calculation period, but it can also be
monitored weekly or monthly. Accordingly, for each day the 6-months SIBOR fixes within the predefined
range, one day of interest at the predefined floating rate is accrued. If the index rate fixes within the
predefined range every day of the calculation period, then 100% of the floating rate is paid. On the oth-
erside, if the index rate fixes within the predefined range only 60% of the calculation period, then 60%
of the floating rate is paid.

Note that the range can remain the same throughout the life of the swap, or it can be changed accord-
ing to a preset schedule. For example, for a 5-years swap, it can be [0 - 4%] for the 2 first years, and [0
5.5%] for the 3 last years.

Sample of a Range Accrual Swap trade
Notional amount : 350 million Saudi Riyals (amortizing to 0 as per the schedule below)
Duration : 7 years (differed start in 2 years grace period + 5 Years of interest payment)
Trade Date : 24 February 2014
Start Date : 24 February 2016
Maturity Date : 24 February 2021
Floating Rate : SAR 6-months SIBOR for the number of days where 6-months SIBOR is within [0-4.00%]
Fixed Rate : 2.975% per annum
Fixed Rate Payer: CLIENT
Floating Rate Payer: Riyad Bank
Schedule as per the table below:


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Structured Solutions Desk
Treasury Department
+966 (11) 4042621
Fixing Date
Payment Period
SAR Notional
Start Date End Date
22-Feb-16 24-Feb-16 24-Jul-16 350,000,000.00
21-Jul-16 24-Jul-16 24-Feb-17 315,000,000.00
22-Feb-17 24-Feb-17 24-Jul-17 280,000,000.00
20-Jul-17 24-Jul-17 24-Feb-18 245,000,000.00
22-Feb-18 24-Feb-18 24-Jul-18 210,000,000.00
22-Jul-18 24-Jul-18 24-Feb-19 175,000,000.00
21-Feb-19 24-Feb-19 24-Jul-19 140,000,000.00
22-Jul-19 24-Jul-19 24-Feb-20 105,000,000.00
20-Feb-20 24-Feb-20 24-Jul-20 70,000,000.00
22-Jul-20 24-Jul-20 24-Feb-21 35,000,000.00

Product Mechanism
On each fixing date, the 6M SIBOR for the period will be fixed. For example, on the 22
nd
of February
2016, the SIBOR 6M fixing will be applied to the period starting on the 24/02/2016 and ending on
24/07/2016. Then we will count the number of days the daily 6M SIBOR has been within the range [0
4%].
For the sake of example, lets take 3 case scenarios:
1. Case 1: 6M SIBOR on the 22/02/2016 was 2.85% and during the period 24/02/2016 to
24/07/2016, 6M SIBOR fixed within [0 - 4.00%] the whole time:
- CLIENT pays fixed rate as: 2.975%*151/360*350,000,000 = SAR 4,367,465 to Riyad Bank
- Riyad Bank pays 6M SIBOR as: (2.85%*151/151)*151/360*350,000,000 = SAR 4,183,958 to
CLIENT

2. Case 2: 6M SIBOR on the 22/02/2016 was 2.50% and during the period 24/02/2016 to
24/07/2016, 6M SIBOR fixed within [0 - 4.00%] 89 days only:
- CLIENT will pay fixed rate as: 2.975%*151/360*350,000,000 = SAR 4,367,465 to Riyad Bank
- Riyad Bank pays SIBOR6M as: (2.85%*89/151)*151/360*350,000,000 = SAR 2,466,042 to
CLIENT

3. Case 3: 6M SIBOR on the 22/02/2016 was 2.50% and during the period 24/02/2016 to
24/07/2016, 6M SIBOR fixed within [0 - 4.00%] 9 days only:
- CLIENT will pay fixed rate as: 2.975%*151/360*350,000,000 = SAR 4,367,465 to Riyad Bank
- Riyad Bank pays SIBOR6M as: (2.85%*9/151)*151/360*350,000,000 = SAR 249,375 to CLI-
ENT
The structured products business model in Riyad Bank is a back-to-back business, no open positions are
managed, that means than when a client enters in a range accrual swap with us, we will take the oppo-
site position with another counterparty bank. To generate profit from this trade Riyad Bank has 2 mains
options:
- Take a up-front bank from the counterparty bank
- Or take a direct margin on top of the fixed rate that will be offered to the client, so the premium
will be collected throughout the live of the trade (in the sample example, every semester)

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Structured Solutions Desk
Treasury Department
+966 (11) 4042621
Riyad Bank is facing two kind of risks:
- Related to the client: in case the client is in the incapacity to pay the fixed rate on any payment
date, Riyad Bank still has the obligation to pay a fixed rate to the counterparty bank
- Related to the counterparty bank: in case the counterparty is in the incapacity to pay the float-
ing rate on any payment date, Riyad Bank still has the obligation to pay this rate to the the client
Flow Details:
In this section, the flow details for the loan and the range accrual swap are presented. As mentioned
before, Riyad Bank can generate profit from this trade under 2 ways:
a- Up-Front premium
In this case, Riyad Bank is receiving a Up-Front premium at the date of inception from the coun-
terparty bank for entering into the Range Accrual Swap and giving the same rates to the client.


Client Riyad Bank
6

2.975% (per annum)
Lender
SIBOR 6M
Counterparty Bank
2.975%
(per annum)
On the trade
date: SAR
3.3 million
Uf-Premium
6

Where:
n = number of days in the payment period where the index rate (SIBOR 6M) has fixed within the
range [0 4.0%]
N = number of days in the payment period

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Structured Solutions Desk
Treasury Department
+966 (11) 4042621

b- Premium throughout the trade
In this case, the premium is generated by the difference between the fixed rate, 2.975%, that
the client has to pay on each interest payment date to Riyad Bank and the fixed rate, 2.605%,
Riyad Bank has to pay to the counterparty bank as showed in the figure below:


Client Riyad Bank
2.975% (per annum)
Lender
SIBOR 6M
Counterparty Bank
2.605%
(per annum)
6

Where:
n = number of days in the payment period where the index rate (SIBOR 6M) has fixed within the
range [0 4.0%]
N = number of days in the payment period
6